Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Monday, 29 October 2012

Azizonomics claims that when government incurs debt,
taxpayers who don’t hold much debt or any debt, pay taxes to fund interest
payments to debt holders. (h/t Mike Norman). And that is allegedly a burden on
taxpayers.

However that argument omits inflation, which is an important
at the moment given that interest on government debt in several countries is
more or less equal to inflation in those countries (e.g. U.S. Germany &
U.K.).
So let’s run through the argument and let’s assume that
interest is exactly equal to inflation (say 2%). If government funds something
via borrowing rather than tax, taxpayers who are not in the habit of holding
government debt pay less tax. Let’s say to keep things simple that the government
debt is repaid (plus interest) after one year. That means that at the end of
the year those taxpayers have to fund repayment of capital and interest.

But hang on. $X at the end of the year is worth 2% less
than at the beginning. So on balance there is no net burden on taxpayers. In
effect, taxpayers just get an interest free loan. Not bad, eh?

Sunday, 28 October 2012

I favour
full reserve banking, but I’m not under the illusion suffered by what I think
are the more naïve and evangelical full reserve advocates, namely that full
reserve will solve every other problem on planet Earth, including environmental
problems, poverty, the alleged national debt problem, the alleged personal debt
problem.

The
national debt.

Full reserve
has no bearing on the alleged national debt problem, because that debt is
easily reduced at any time. Don’t know how? Try this.

First, have
the central bank print money and buy back the debt (exactly what several
countries have been doing big time in recent years under the guise of QE).

Second, to
the extent that the latter QE type policy is too inflationary, raise taxes
(and/or cut public spending) by enough to give a deflationary effect that
cancels out the inflationary effect of QE, which frankly isn’t of astronomic
proportions. I.e. if the recent and massive amounts of QE have had a huge
stimulatory or inflationary effect, where is the evidence? The large numbers of
people currently trying to find work would doubtless also like to know.

National debts exist, amongst other reasons, because of a
desire by the private sector (pension funds in particular) to hold paper
assets. That desire won’t vanish just
because we convert from fractional to full reserve.Indeed,
there are currently concerns about a SHORTAGE of quality paper assets. Also of
some relevance, see David Beckworth’s five facts here.

Put another
way, it is the easiest thing in the world for a country that issues its own
currency to substantially reduce its national debt. But all that happens is
that former debt holders end up holding monetary base. And the latter is also
(at least nominally) a debt owed by government to those “holders”. Or put that
another way, if a country has a national debt that is of such a size that
creditors demand any significant rate of interest, such a country can simply
buy back enough of the debt until the interest on that debt nears zero, which
makes the debt little different in nature to monetary base.

Now that
amounts pretty much to saying that national debts are pointless and that the
only liability issued by the government / central bank machine should be MONEY,
or monetary base to be exact. And what do you know? That’s exactly what Milton
Friedman advocated in a paper entitled “A Monetary and Fiscal Framework for
Economic Stability”. He said:

“Under the
proposal, government expenditures would be financed entirely by either tax
revenues or the creation of money, that is, the issue of non-interest-bearing
securities. Government would not issue interest-bearing securities to the
public….”

Another authority
on these matters, Warren Mosler, said much the same. He said:

“I would
cease all issuance of Treasury securities. Instead any deficit spending would
accumulate as excess reserve balances at the Fed. No public purpose is served
by the issuance of Treasury securities….”

And if you
want some more detailed arguments (put by me) as to why national debts are
pointless, see here.

Personal
debts.

Re the idea
that fractional reserve increases the amount of personal debt, I largely demolished
that idea here. However, a further point needs making in that connection, as
follows.

Borrowing
and lending takes place for the very simple reason that the cash that households,
firms and other entities have at their disposal does not tie up with the cash
REQUIREMENTS of those entities. E.g. some people have surplus cash, while
others want cash for buying a house. Some people want cash to start up or
expand a business, but don’t have the cash to hand.

Now that mismatch
between cash available and cash required or wanted is not affected one iota by
a switch from fractional to full reserve. Thus a switch to full reserve will not
greatly change the total amount of borrowing and lending.

Interest
rates.

There is
however, one route via which full reserve reduces personal debts which is thus.

Assuming the
full reserve system implemented is something along the lines advocated by
Kotlikoff or Werner, it involves lenders taking a hit where relevant loans go
bad (instead of banks or taxpayers taking a hit). And lenders will want extra
interest for taking that risk: i.e. interest rates will rise.

The effect
of that on its own would be deflationary, thus government would need to create
and spend extra monetary base into the economy, which in turn would mean
debtors and creditors having a bigger stock of cash. And that in turn would
bring a reduced need for borrowing.

So on
balance, does full reserve bring instant nirvana for debtors? Hardly. They’d
borrow less, but they’d pay more interest on whatever they did borrow. And
those two effects might well cancel out. I.e. debtors might continue paying
exactly the same total amount of interest. And it’s the affordability of the
interest that is one of the main problems for debtors.

Environmental
matters.

The full
versus fractional reserve argument is entirely separate from the question as to
how to deal with environmental problems. To illustrate, we could perfectly well
carry on with the existing fractional reserve banking system and implement substantial
annual increases in the price of carbon based fuels starting tomorrow. Plus we
could spend twice as much on solar, wind and tidal power generation starting
next week. There is nothing about fractional reserve banking that stops us
implementing the latter sort of environmental measures.

Tuesday, 23 October 2012

Four articles have
appeared recently about whether government debt held by central banks should be
torn up. See here,here,here and here. (h/t to Mike Norman). What took those
article writers so long? I advocated the idea last Febuary here.

Monday, 22 October 2012

In this article,
Congdon says that bank regulation will constrain bank lending and reduce what
he calls “money balances”. I’m afraid that is not the revelation
of the century.To put the point
more accurately, more regulation will reduce bank lending and money balances
ALL ELSE EQUAL. And therein lies the flaw in his point. I.e., all else does
need to be equal.

That is, if
regulators decide that the amount that loss absorbing bank creditors have to
stump up per pound or dollar of bank lending / investment should be doubled,
then clearly that has a deflationary effect. But that’s easily countered by having
government and central bank create and spend more money into the economy.

The effect of that
is to increase the cash balances of every household and firm, thus the latter
WON’T NEED to borrow so much. To that extent, reduced bank lending doesn’t
matter.

Congdon then says,
“Further, the more zealous regulators are in eliminating risk from bank balance
sheets, the more rapid is the destruction of money balances.” Well poor old Tim
must be having fits at the full reserve proposals put by Laurence Kotlokoff,
Positive Money, Prof. Richard Werner and others. Reason is that the latter
proposals pretty much remove ALL RISK from bank balance sheets (the risk is
loaded onto depositors who want to behave in a commercial fashion: i.e. have
their money invested).

Now personally I
don’t see much wrong with removing risk from bank balance sheets: risk which is
actually born by the taxpayer. And that risk taking amounts to a HUGE SUBSIDY
of the banking industry. Personally I think there is NO EXCUSE WHATEVER for
subsidising an industry which ought to pay its own way. But if Congdon has good
justifications for that subsidy, I’m all ears. I’ve read several of his publications
and don’t remember him justifying mega bank subsidies, but I might have missed
something.

Sunday, 21 October 2012

The
conventional and economically illiterate story about the deficit (repeated a
thousand times by politicians and other ignoramuses) is as follows (in green).

There’s
a deficit. We could reduce it by raising taxes or cutting public spending. But
that hits growth: the last thing we want in a recession.

On
the other hand if the deficit continues, that can lead to too large a national
debt, which in turn means creditors may ask for higher rates of interest. Now
we’re really in a bind, aren’t we?

Answer:
“no, we’re not.”

The
above nonsense was unfortunately repeated recently by “Economics Help”, an
economics tutorial site (which publishes informative material 99% of the time).

The truth about deficits and debts.

The
following explanation is actually just an expanded version of one of the most succinct
phrases ever uttered by an economist: it was Keynes’s phrase, “Look after
unemployment, and the budget will look after itself”. But the meaning of that phrase
is way beyond the comprehension of the above ignoramuses, which is why it is
necessary to explain the phrase (over and over and over again).

First,
deficits do not need to accumulate as extra debt. As Keynes, Milton Friedman
and a hundred other economists have pointed out ad nausiam, deficits can
equally well accumulate as extra monetary base. Unfortunately the above
Economics Help article gets this point wrong: its opening paragraph reads, “A
budget deficit occurs when a government spending is much greater than tax
revenues. This leads to an accumulation of public sector debt.”

Indeed,
thanks to QE, recent deficits ACTUALLY HAVE accumulated to a large extent as
extra base rather than debt. Doh!

Second,
EXPANDING NATIONAL DEBTS WILL NOT LEAD TO ELEVATED RATES OF INTEREST AS LONG AS
DEBT HOLDERS ARE HAPPY TO HOLD THE EXTRA DEBT.

Indeed,
that’s exactly what has happened over the last two or three years (Doh again).

Moreover,
the very fact that debt holders are happy to expand their debt or monetary base
holdings is proof that the private sector’s desire to save money rather than
spend is contributing to unemployment: it’s proof that Keynsian paradox of
thrift is at play. I.e. as long as interest rates remain low, running a deficit
with a consequent rise in the debt or base is EXACTLY THE RIGHT POLICY.

Rising interest rates.

In
contrast, if the rate of interest demanded by creditors DOES RISE, that is
proof that creditors are NOT SO WILLING to hold or expand their holdings of
debt or base (forgive the statement of the obvious, but this article is very
much into stating the blindly obvious).

Given
rising interest rates, a country will not, REPEAT NOT, have to pay any
additional interest immediately: it will only pay additional interest (if it’s
silly enough to actually do so) on NEW DEBT or “rolled over” debt.

But
the rational reaction in that scenario is to just abstain from issuing new
debt. I.e. the rational policy is to pay back creditors EITHER BY by getting
the money from raised taxes (and/or public spending cuts), OR BY printing money
and paying off the creditors.

As
to which of the latter two to go for, that depends on whether the economy can
take more stimulus or not. If it can, then the money printing option is best.
If not, the raised taxes / public spending cut option is best.

And
the reaction of the ignoramouses to the above two options is a predictable as
it is boring. They react to the money printing option with the word
“inflation”. Well there won’t be any inflation if the economy still has
significant unused capacity (exactly what has happened over the last two or
three years- doh again).

And
as the idea that those tax increases or spending cuts will hit growth, they’ll
have absolutely no effect on growth in the sense that if inflation is allowed
to run riot, far from bringing increased growth, it just brings chaos and
REDUCED GROWTH.

In
other words (irony of ironies), given rising inflation, confiscating
household’s money via tax (or implementing public spending cuts) actually make
everyone better off, or at least it prevents them becoming WORSE OFF as a
result of the damaging effects of excess inflation.

To
summarise, for a country that issues its own currency, the best policies are:

1.
Given a large deficit and rising national debt and excess unemployment the
correct response is to continue with the deficit and rising national debt
(though letting the deficit accumulate as extra base would do equally well).

2.
Given excess unemployment and rising interest rates the correct response is to
continue with deficit but let it accumulate as extra base.

3.
If the latter looks like exacerbating inflation, then unemployment is not
excessive – at least in the sense that there is some level of unemploymentbelow which it is difficult to go without
inflation kicking in. And if inflation IS RISING, that point has probably been
reached. Dealing with the remaining unemployment is then difficult: at least,
the problem cannot be solved by the simple expedient of increasing aggregate
demand.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

As I’ve explained for some time on this blog, the recently popular idea that “banks don’t intermediate: they create money” is over-simple. Reason is that they do a bit of both. So it’s nice to see an article that seems to agree with me. (h/t Stephanie Schulte). Mind - I've only skimmed thru the intro to that article.________

Half of landlords in one part of London do not declare rental income to the tax authorities. I might as well join in the fun. I’ll return my tax return to the authorities with a brief letter saying, “Dear Sirs, Thank you for your invitation to take part in your income tax scheme. Unfortunately I am very busy and do not have time. Yours, etc.”________

Simon Wren-Lewis (Oxford economics prof) describes having George Osborne in charge of the economy as being “similar to someone who has never learnt to drive, taking a car onto the highway and causing mayhem”. I’ll drink to that.

Unfortunately SW-L keeps very quiet, as he always does, about the contribution his own profession made to this mess. In particular he doesn’t mention Kenneth Rogoff, Carmen Reinhart or Alberto Alesina – all of them influential economists who over the last ten years have advocated limiting stimulus (because of “the debt”) if not full blown austerity.________

Plenty of support in the comments at this MMT site for the basic ideas behind full reserve banking, though the phrase “full reserve” is not actually used.________

Old Guardian article by Will Hutton claiming the UK should have joined the Euro. Classic Guardian and absolutely hilarious.________

One of the first “daler” coins (hence the word “dollar”) weighed 14kg.!!! Imagine going shopping for the groceries with some of those in your pocket, or should I say “in your wheelbarrow”. (h/t J.P.Koning)________

Moronic Fed official reveals that GDP tends to rise when population rises. Next up: Fed reveals that grass is green and water is wet….:-)________

Fran Boait of Positive Money says the Bank of England "has no capacity to respond to a future crisis, and that puts us in an extremely dangerous position." Well certainly there are plenty of twits at the Treasury and at the BoE who THINK responding will be difficult. Actually there's an easy solution: fiscal stimulus, funded (as suggested by Keynes) by new money. Indeed, that’s what PM itself advocates. But it’s far from clear how many people in high places have heard of Keynes or, where they have heard of him, know what his solution for unemployment was.________

The US debt ceiling has been suspended or lifted 84 times since it was first established. You’d think that having made the Earth shattering discovery 84 times that the debt ceiling is nonsense, that debt ceiling enthusiasts would have learned their lesson, wouldn’t you? I mean if I got drunk 24 times and had 24 car crashes soon afterwards, I’d probably get the point that alcohol causes car crashes…:-) As for getting drunk 84 times and having 84 car crashes, that would indicate extreme stupidity on my part. No?________

The US Treasury has the power to print money (rather in the same way as the UK Treasury printed money in the form of so called “Bradburies” at the outbreak of the first World War).________

“Payment Protection Insurance” was a trick used by UK banks: it involved surreptitiously getting customers to take out insurance against the possibility of not being able to make credit card or mortgage payments. UK banks have been forced to repay customers billions. But that’s just one example of a more general trick used by banks sometimes called “tying”: forcing, tricking or persuading customers to buy one bank product when they buy another. More details here on the Fed’s half-baked attempts to control tying in the US.________

The farcical story of economists’ apparent inability to raise inflation continues. As I’ve long pointed out, Robert Mugabe knows how to do that. In fact Mugabe should be in charge of economics at Harvard: he’d be a big improvement on Kenneth Rogoff, Carmen Reinhart and other ignoramuses at Harvard.________

I’ve removed comment moderation from this blog. The only reason I ever implemented it was so as get rid of commercial organisations advertising something and posing as commenters. When doing that I noticed comments were limited to people with Google accounts for some strange reason. Removed that as well. ________

Article on money creation by Prof Charles Adams, who as far as I can see is a professor of physics at my local university – Durham. I can’t fault the first half of his article, but don’t agree with the second half which claims both publically and privately issued money are needed because we have a public and private sector. I left a comment.

Adams is nowhere near the first physicist to take an interest in money creation. Another is William Hummel. These “physicist / economists” are normally very clued up (as befits someone with enough brain to be a physicist).________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A